Share-Based Compensation

9 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

Under CSX's share-based compensation plans, awards consist of performance units, restricted stock awards, restricted stock units and stock options for management and stock grants for directors. Awards granted under the various programs are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the full Board for awards to the Chief Executive Officer or by the Chief Executive Officer for awards to management employees other than senior executives. The Board of Directors approves awards granted to CSX's non-management directors upon recommendation of the Governance Committee.

Share-based compensation expense for awards under share-based compensation plans and purchases made as part of the employee stock purchase plan is measured using the fair value of the award on the grant date and is recognized on a straight-line basis over the service period of the respective award. Total pre-tax expense and income tax benefits associated with share-based compensation are shown in the table below. Income tax benefits include impacts from option exercises and the vesting of other equity awards.



	Third Quarters				Nine Months
(Dollars in millions)	2019		2018		2019		2018

Share-Based Compensation Expense:
Performance Units	$	8	$	8	$	23	$	22
Stock Options	2		4		9		10
Restricted Stock Units and Awards	2		1		6		4
Stock Awards for Directors	—		—		2		2
Employee Stock Purchase Plan	1		—		3		—
Total Share-Based Compensation Expense	$	13	$	13	$	43	$	38
Income Tax Benefit	$	6	$	6	$	41	$	23

Long-term Incentive Plan

In February 2019, the Company granted approximately 300 thousand performance units to certain employees under a new long-term incentive plan ("LTIP") for the years 2019 through 2021, which was adopted under the CSX 2010 Stock and Incentive Award Plan. On May 3, 2019, shareholders approved the CSX 2019 Stock and Incentive Award Plan, under which future awards will be granted.

NOTE 3. Share-Based Compensation, continued

Payouts of performance units for the cycle ending with fiscal year 2021 will be based on the achievement of goals related to both operating ratio and free cash flow, in each case excluding non-recurring items as disclosed in the Company's financial statements. The cumulative operating ratio and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other.

Grants were made in performance units, with each unit representing the right to receive one share of CSX common stock, and payouts will be made in CSX common stock. The payout range for participants will be between 0% and 200% of the target awards depending on Company performance against predetermined goals. Payouts for certain executive officers are subject to formulaic upward or downward adjustment by up to 25%, capped at an overall payout of 225%, based upon the Company's total shareholder return relative to specified comparable groups over the performance period. The fair values of the performance units awarded during the third quarters and nine months 2019 and 2018 were calculated using a Monte-Carlo simulation model with the following weighted-average assumptions:



	Third Quarters			Nine Months
	2019^(a)	2018		2019		2018
Weighted-average assumptions used:
Annual dividend yield	N/A	1.2	%	1.4	%	1.6	%
Risk-free interest rate	N/A	2.7	%	2.5	%	2.3	%
Annualized volatility	N/A	27.9	%	27.6	%	29.1	%
Expected life (in years)	N/A	2.3		2.9		2.9

(a) No performance units were awarded in third quarter 2019.

Stock Options

Also, in February 2019, the Company granted approximately 843 thousand stock options along with the corresponding LTIP. The fair value of stock options on the date of grant was $17.45 per option, which was calculated using the Black-Scholes valuation model. These stock options were granted with ten-year terms and vest over three years in equal installments each year on the anniversary of the grant date. The exercise price for stock options granted equals the closing market price of the underlying stock on the date of grant. These awards are time-based and are not based upon attainment of performance goals. During third quarters 2019 and 2018, there were immaterial grants of stock options to certain members of management.

NOTE 3. Share-Based Compensation, continued

The fair values of all stock option awards during the quarters and nine months ended September 30, 2019 and September 30, 2018 were estimated at the grant date with the following weighted average assumptions:



	Third Quarters						Nine Months
	2019			2018			2019			2018
Weighted-average grant-date fair value	$	15.44		$	20.52		$	17.99		$	14.65

Stock options valuation assumptions:
Annual dividend yield	1.4		%	1.2		%	1.3		%	1.5		%
Risk-free interest rate	1.4		%	2.8		%	2.5		%	2.6		%
Annualized volatility	25.7		%	25.5		%	25.7		%	27.0		%
Expected life (in years)	6.5			6.5			6.1			6.5

Other pricing model inputs:
Weighted-average grant-date market price of CSX stock (strike price)	$	66.35		$	74.84		$	69.96		$	54.19

Restricted Stock Units

Finally, in February 2019, the Company granted approximately 65 thousand restricted stock units along with the corresponding LTIP. The restricted stock units vest three years after the date of grant. Participants receive cash dividend equivalents on the unvested shares during the restriction period. These awards are time-based and are not based upon CSX's attainment of operational targets. Restricted stock units are paid-out in CSX common stock on a one-for-one basis. For information related to the Company's other outstanding long-term incentive compensation, see CSX's most recent annual report on Form 10-K.

Employee Stock Purchase Plan

In May 2018, shareholders approved the 2018 CSX Employee Stock Purchase Plan (“ESPP”) for the benefit of Company employees. The Company registered 4 million shares of common stock that may be issued pursuant to this plan. Under the ESPP, employees may contribute between 1% and 10% of base compensation, after-tax, to purchase up to $25,000 of CSX common stock per year at 85% of the closing market price on either the grant date or the last day of the six-month offering period, whichever is lower. During third quarter and nine months ended 2019, 144 thousand and 249 thousand shares of CSX stock were issued at a weighted average purchase price of $52.66 and $52.72 per share, respectively.